One of the earliest influences for our firm’s focus on valued based business perspective investing was Warren Buffett and Berkshire Hathaway (BRK.B,BRK.A). Our firm has even held a long position in Berkshire’s Class B shares since 2011. We have not always agreed on some of Berkshire’s recent investments in the automotive sector and the media sector and we believe that Berkshire could stand to pay out a part of its $70B in cash and fixed maturity securities, but we have immense respect for the living legend himself. Even though Berkshire split its Class B shares 50-1 in order to acquire the Burlington Northern Santa Fe Railroad, we are surprised that only two analysts cover the company. Fortunately, we are here to provide a fair and balanced evaluation of Berkshire Hathaway.

Berkshire Manufacturing, Service and Retailing

The first item that caught our attention was the growth in revenues from Berkshire’s Manufacturing, Service and Retailing businesses. Revenue grew by $2.5B in Q2 2012 versus Q1 2011 and reached a total of $20.8B. This was driven by price increases at the McLane Company wholesale distribution business and the inclusion of Lubrizol revenues in this quarter versus last year. The Lubrizol acquisition was announced on March 14th, 2011 and completed on September 16th, 2011. Unfortunately we couldn’t say “See You in September” to David Sokol, the man who suggested it to Warren. We can understand why Sokol was keen on Lubrizol. Lubrizol’s numbers were choppy and mediocre from 1996-2005, but seemed to turn a corner in 2006 and generated explosive EPS growth in 2009 and 2010. We are not displeased that Berkshire spent $8.7B on Lubrizol even if it has volatile financial results instead of keeping it in the cash stash, though we certainly would have preferred that given the choice between buying Lubrizol and giving us a special dividend of $3.50 a share, we would have most definitely taken the $3.50 a share and reinvested it ourselves.

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